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24–092 PDF 2005

SOCIAL SECURITY REFORM:

SUCCESSES AND LESSONS LEARNED

HEARING

BEFORE THE

SUBCOMMITTEE ON 

DOMESTIC AND INTERNATIONAL 

MONETARY POLICY, TRADE AND TECHNOLOGY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 5, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–25

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY, TRADE AND

TECHNOLOGY

DEBORAH PRYCE, Ohio, Chair

JUDY BIGGERT, Illinois, Vice Chair 

JAMES A. LEACH, Iowa 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

MARK R. KENNEDY, Minnesota 

KATHERINE HARRIS, Florida 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

CAROLYN B. MALONEY, New York 

BERNARD SANDERS, Vermont 

MELVIN L. WATT, North Carolina 

MAXINE WATERS, California 

BARBARA LEE, California 

PAUL E. KANJORSKI, Pennsylvania 

BRAD SHERMAN, California 

LUIS V. GUTIERREZ, Illinois 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin 

JOSEPH CROWLEY, New York 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

May 5, 2005 ....................................................................................................... 1

Appendix: 

May 5, 2005 ....................................................................................................... 29

WITNESSES 

THURSDAY, MAY 5, 2005

Amelio, Gary, Executive Director, Federal Retirement Thrift Investment 

Board ..................................................................................................................... 8

Cavanaugh, Francis X., Public Finance Consulting ............................................. 12

James, Estelle, Consultant and Professor Emeritus, Suny, Stony Brook ........... 9

Purcell, Patrick, Specialist in Social Legislation, Congressional Research Service .......................................................................................................................... 11

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 30

Maloney, Hon. Carolyn B. ................................................................................ 35

Pryce, Hon. Deborah ........................................................................................ 44

Wasserman Schultz, Hon. Debbie ................................................................... 46

Amelio, Gary ..................................................................................................... 48

Cavanaugh, Francis X. ..................................................................................... 67

James, Estelle (with attachments) .................................................................. 79

Purcell, Patrick ................................................................................................. 118

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

‘‘Why Personal Accounts and Why Now?’’ ...................................................... 128

Amelio, Gary: 

Written response to questions from Hon. Barbara Lee ........................................ 131

James, Estelle: 

Written response to questions from Hon. Barney Frank ..................................... 132

Written response to questions from Hon. Barbara Lee ........................................ 133

(1)

SOCIAL SECURITY REFORM: 

SUCCESSES AND LESSONS LEARNED 

Thursday, May 5, 2005

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL

MONETARY POLICY, TRADE AND TECHNOLOGY, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to call, at 10:05 a.m., in Room 

2128, Rayburn House Office Building, Hon. Deborah Pryce [chairman of the subcommittee] presiding. 

Present: Representatives Pryce, Biggert, Harris, Gerlach, 

Neugebauer, Price, Maloney, Waters, Moore, Frank, and Pearce. 

Chairman PRYCE. [Presiding.] Good morning. The hearing of the 

Subcommittee on Domestic and International Monetary Policy, 

Trade and Technology will now come to order. 

Thank you all for being here today to discuss Social Security reform and review the successes and lessons learned from both foreign countries and our own plan for federal workers, the Thrift 

Savings Plan. The witnesses at this hearing have immeasurable 

knowledge of the structural reforms undertaken by our international counterparts, and also the importance of incorporating private accounts into any reforms we make here at home. 

We know that the United States is wonderfully unique in its history, its economy and its people. Therefore, the lessons learned by 

the systems that work well or do not work well in other countries 

may not be directly analogous to the United States. Differences in 

population, life expectancy, and savings rates are just a few examples of the fine nuances that can make the application of the same 

policies yield dramatically different results. Indeed, our goal should 

not be to mimic the retirement programs of other nations. Rather, 

we should aim to enact a system that is tailor-made for the people 

and the economy of our United States. 

Having said that, examining the retirement security systems of 

other nations can and should be done by this committee and this 

Congress. Other countries’s experiences in implementing these retirement security policies can provide very valuable lessons for us. 

By reviewing the successes and shortcomings of other nations’s programs, we will find areas that can be improved upon and then 

made applicable to the American experience. 

A case in point is the United Kingdom’s efforts at pension reform. According to the Congressional Research Service, this misselling of personal pensions is said to have affected 1.5 million 

workers, mostly older and lower-paid, who were persuaded by overVerDate 0ct 09 2002 13:53 Oct 31, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\DOCS\24092.TXT FIN1 PsN: MICAH
2

zealous sales agents to switch to risky, inappropriate plans based 

on unduly optimistic estimates on rates of return. The government 

has ordered companies to reimburse these workers at an estimated 

cost of $3.2 billion to date, with total costs projected to reach $20 

billion. 

Investor choice is just as significant as investor protection in any 

voluntary personal accounts. We have seen the stagnant rates of 

return in Chile, where workers initially had no investment choice, 

with only one portfolio offered for over 20 years. Finally, Chile reformed its system to offer five portfolios with different degrees of 

risk. 

I was pleased to read Dr. Estelle James’s quote in a recent 

Washington Post article saying, ‘‘If we create personal accounts in 

the United States, we should also make portfolio choices simple, 

limited and diversified, including international securities, to protect 

inexperienced investors from themselves.’’

As Congress moves forward in drafting legislation to reform our 

Social Security system, this committee must stay involved to ensure that proper protections for investors and increased financial 

literacy are included. In addition, any plan to reform Social Security will require a concentrated effort by Congress to craft a program that will remain solvent long after we are gone. We have an 

opportunity to broaden the discussion to include a range of retirement security issues and to educate Americans on the personal 

savings plans provided by the financial services industry today. 

Financial literacy empowers individuals to manage money, credit 

and debt and become responsible workers, heads of households, investors, entrepreneurs and business leaders. While Congress can 

make laws and provide savings vehicles for Americans’s retirement 

through Social Security or personal retirement accounts, only with 

an overall understanding of financial services can a person truly 

benefit from an investment in their future. 

We must continue to do more to reach out to more people. Like 

the Thrift Savings Plan, voluntary personal accounts would provide 

safe investment opportunities. In addition to a no-risk option of investing in U.S. Treasury bonds, the accounts could be invested only 

in secure bond and stock index funds, including a life-cycle fund designed to protect workers from sudden market changes on the eve 

of their retirement. 

With more than three million investors, the TSP is the largest 

individual account retirement system in the country. It has been 

successful in keeping costs to consumers low through the use of 

competitive bidding. In 2003, the TSP had $129 billion in assets 

under management and paid just over $2.1 million in investment 

expenses. The introduction of personal retirement accounts to the 

public means that they must be designed with adequate regulation 

and oversight. There must be a significant investor protection effort 

in addition to financial literacy so that people can understand the 

investments that are offered and make appropriate choices. 

I look forward to a lively discussion today and appreciate the 

witnesses’s sharing with us their knowledge on this issue. Without 

objection, all members’s opening statements will be made a part of 

the record. 

3

At this time, I would like to recognize my friend, the gentlelady 

from New York, the Ranking Member of this subcommittee, Congresswoman Maloney, for her opening statement. 

Mrs. MALONEY. Thank you so much, Madam Chair. I am glad 

that you are focusing on this important issue. 

I certainly welcome the distinguished witnesses that we have 

here today. 

One of my amendments is up in a markup in another committee. 

I am going to summarize my remarks and defer to the Ranking 

Chairman for the continuation. 

I just feel that this is extremely important, and that we need to 

look at what has happened in other countries. In many of the other 

countries it has not been successful. 

To give one example, the U.K. adopted voluntary individual accounts very similar to the plan put forth by the administration. 

Many workers who switched lost money and have now switched 

back to the traditional plan. The scandal forced the government to 

introduce a variety of reforms and aggressive enforcements. Currently, financial firms are now repaying $22 billion to individuals 

who were given unsuitable recommendations. 

At retirement under the plan being put forth by the Bush administration, workers would pay back the amount they contributed to 

private accounts, with interest, through a reduction in their guaranteed security benefit. The interest rate would be 3 percent above 

the rate of inflation, which is the same that they would get if they 

had left their money in the trust fund invested in Treasury notes. 

I would like permission to place into the record a research paper 

that was written recently by Yale economist Robert Schiller that 

demonstrates that if workers invest in life-cycle accounts, which 

President Bush has suggested as the appropriate default investment option, about 70 percent of workers would be worse under 

private accounts than if they had stayed in the traditional system 

and they would not make more than they have to pay back. 

Very problematic is the cost of transition. Earlier, Alan Greenspan testified that these private accounts will do nothing to help 

the solvency of the current Social Security system, but will add a 

great deal of debt. The administration’s proposal includes zero 

funding for the President’s proposal for private accounts, and thus 

would rely on increased government borrowing to pay the transition costs at a debt of over $7 trillion and over $450 billion deficit. 

This is very troubling to me. The administration estimates that the 

President’s private accounts would add another $754 billion to the 

public debt in the current budget window. 

Because this does not start until 2009 and then phases in gradually, the true costs are truly much, much higher and Vice President 

Cheney has conceded that it would be trillions. The plan would add 

an estimated $1.4 trillion of public debt in the first 10 years, followed by another $3.5 trillion in the second decade. The increases 

in debt are large and longstanding. The additional debt would continue to grow relative to the size of the economy, reaching 35 percent of GDP. I mean, that is truly frightening to me. If other countries should decide that they do not want to hold much of that debt, 

we would be looking at a very, very serious economic situation. 

4

Another problem with privatization is the high cost of administrative and marketing that is estimated to be 30 percent from the 

worker’s point of view, which is a great deal of money. I must say 

that I certainly support the Thrift Savings Plan. I would support 

a similar plan on top of Social Security as it exists now for federal 

employees, but that this system is one that has served our public 

well for so very long, and we should really look at the experience 

of other countries before dismantling a system that has served so 

many for so long and so well. 

I have quite a lengthy statement. I am going to ask to have the 

entire statement placed in the record. 

I would like to yield to the Ranking Member, and I will be right 

back after I offer my amendment in my markup in the other room. 

Mr. FRANK. I assume there will be an opening statement on the 

other side first. 

Mrs. MALONEY. Okay. 

Chairman PRYCE. And then we will come back. 

All right. Now, I would like to recognize the Vice Chairman of 

the committee, Mrs. Judy Biggert. 

Mrs. BIGGERT. Thank you, Madam Chairman. I would like to 

thank you for holding this important hearing today. 

As we work to establish solvency in the current Social Security 

system and find additional ways to increase the savings rate, I 

think it is prudent to examine programs that work or do not work, 

both within our own country and abroad. We know that our Social 

Security system works now, but it will not work in the near future. 

We know that programs like the Thrift Savings Plan for federal 

workers and 401(k) retirement plans have inspired Americans to 

save more, to save over longer periods of time, and to gain a return 

on investments that trump any return that the government could 

give them. 

Today, I look forward to hearing from the witnesses about the 

benefits of personal account programs for individuals, things to 

avoid when setting up such accounts, and elements that should be 

included in these accounts. 

With that, I yield back the balance of my time. 

Chairman PRYCE. Thank you, Ms. Biggert. 

The gentleman, the Ranking Member of the committee. 

Mr. FRANK. Thank you, Madam Chair. 

First, on the question of Social Security, I do want to note my 

dismay to read in today’s New York Times the headline—let me 

read the first sentence: ‘‘The Bush administration has warned the 

nation’s biggest labor federation that union-run pension funds may 

be breaking the law in opposing President Bush’s Social Security 

proposals.’’

That is an outrageous effort to coerce people out of exercising 

their political rights. The notion that you have to be careful about 

advocacy is one which this administration has been very uneven in 

applying. 

Apparently, it is okay to use taxpayer money to create phony videos and pass them off as objective news reports, but if a labor 

union decides that it would not be in the interests of its members 

for this bill to go forward, they are going to be threatened. I hope 

5

that the unions will ignore this threat. It is a gross example of the 

wrong kind of politicization. 

Secondly, I am glad that we are having this hearing because I 

think it helps us make a couple of points. First, as I read the early 

rhetoric about letting people have private accounts, it had a strongly libertarian thrust. It was an individual should make the decisions, not the government; that we should free people to do what 

they want with their own money. 

I have noted with some interest that as we have progressed to 

specifics, the individual choice involved has gotten narrower and 

narrower and narrower. We ought to be clear that what we are 

now being told should happen with regard to Social Security accounts severely restricts what the individuals can do. 

That leads to a third point. President Clinton once suggested 

that Social Security funds could be invested in stocks to some extent, and that would increase the return for Social Security as a 

whole, with individuals still having their entitlements, but with 

more money coming into the fund. At the time, a number of people, 

including Chairman Greenspan of the Federal Reserve, expressed 

grave opposition to this, saying that it would be a terrible idea to 

let the federal government make these picks of what stocks should 

be in there. 

But as I read the current proposal, we are getting back to that. 

The current proposal is not to let individuals decide fairly freely 

where to put their money, but to create some limited choices for 

them. The federal government presumably would be the one ultimately making those limited choices. 

So the difference between what President Clinton proposed and 

what we are currently seeing is not, it seems to me, on whether 

or not the federal government has some influence over where the 

money goes, but whether or not we continue to have this guarantee 

to people or whether they are more at risk. 

I was also struck, and I am not going to be able to stay for the 

whole thing, but I was pleased to see in Ms. James’s testimony, actually, let me just say this. I have heard a lot from some of my Republican colleagues about the inappropriateness of America looking 

to foreign countries to make American policy. We have certainly 

heard that with regard to the Supreme Court, and we have often 

heard that this is America and we will make our own decisions, 

and borrowing from foreign countries is really not what we need to 

do. 

I am glad to see that that I think somewhat silly notion has been 

waived in the interests of trying to get support in some ways for 

Social Security, since we have other systems that have done that, 

and the silliness of ignoring the experience of others. Now, everybody has joined into that. 

One of the things that struck me as I read over Ms. James’s 

statement was at the bottom of page two and the top of page three, 

saying that, ‘‘every country that has a personal account system also 

has a minimum pension, most commonly 20 percent to 30 percent 

of the average wage. This is designed to protect workers from both 

financial market and labor market risk.’’ So far, we, America, do 

not have a minimum pension in our current system or in the proVerDate 0ct 09 2002 13:53 Oct 31, 2005 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\DOCS\24092.TXT FIN1 PsN: MICAH
6

posed new system. I think that is a very relevant point of comparison. 

As I understand the President’s proposal, with progressive indexation and with the private accounts taking a significant chunk, up 

to one-half of what you put in, it does not seem to me that we 

would reach that 20 percent to 30 percent minimum. 

The final point I want to talk about is on progressive indexation. 

I want to congratulate the administration on its mathematical 

flexibility. When we are talking about the point at which we begin 

to reduce people’s Social Security from what they would currently 

be legally entitled to, the President says he wants to protect lowincome people and we will begin to go to a progressive, i.e. reductive, approach to their Social Security benefits as they get into middle and upper income. 

Apparently for these purposes, for the purposes of reducing the 

benefits of Social Security below what they now are, middle income 

starts at about $30,000. What strikes me is when we talk about tax 

cuts in this climate in Washington today, middle income seems to 

start at about $150,000. So whether or not you are considered middle income apparently varies. If it is a question of giving you a tax 

cut, it is much higher. If it is a question of when we can reduce 

your benefits, it is much lower. 

The last point I would simply note again is, and I have been 

asked, and others, and I always want to repeat this on Social Security, what is the approach. It is clear that from now until 2018, unlike any other aspect of the federal government, the Social Security 

system will take in more money than it pays out. So for the near 

term, it seems to me we have a very easy solution: put the money 

back. 

Chairman PRYCE. The Chair recognizes Mr. Neugebauer for a 

brief opening statement. 

Mr. NEUGEBAUER. Thank you, Madam Chairwoman, for having 

this hearing. 

This is probably one of the most important things that I think 

that this Congress can do for the future of our children and grandchildren. I have two grandsons that are 4 and 6. I want them to 

have a better plan. 

I think we lose the debate here sometimes about Social Security. 

We are really talking about if we were going to start over today, 

would we put the same system in place today that we have? I think 

the answer overwhelmingly from the people in the 19th District is 

no, we would not. We would go to a system of ownership. 

I had a 75-year-old constituent call me yesterday. She said, ‘‘Congressman, please, please, please allow our grandchildren and children to have accounts that will give them a better return on their 

money.’’ She worked in the private sector for a while and has Social 

Security, but she also opened up an IRA and she said it is amazing 

how much money that IRA accumulated in a relatively short 10-

year period. She said it is a wonderful supplement to the income 

we have today. 

The problem with Social Security today is that it yields about 2 

percent to the folks. I do not think there is probably anybody in 

this room that would accept a 2 percent return on their money. The 

other problem with it is it is not a system of ownership. So today 

7

when families are trying to make retirement decisions, they cannot 

make retirement decisions because they are relying on the whim of 

Congress in the future of what those benefits are going to be. 

So what we do need to do is we need to come to a system that 

gives ownership to the American people and to our children and 

grandchildren in the future, and then figure out how to also at the 

same time reform the system that we have to ensure its solvency. 

But why would we perpetuate a system that we know today is giving a poor return to our citizens? Because we are afraid to address 

some of those important issues. I think these kinds of decisions, 

Madam Chairwoman, are great discussions, ones that we need to 

have. 

We are going to hear about a very successful program, the TSP 

program. But I also want to talk about the fact that there are examples, as Mr. Frank was talking about, looking to other countries. 

We can look to examples in our own country today, where teachers 

systems in Texas, for example, opted out of the Social Security system many years ago because they realized that it was a poor return 

on their investments. 

Now, those people that put basically the same amount of money 

into their retirement system in the teacher retirement system in 

Texas, their retirement benefits are three to four times what their 

counterparts that have been paying into the Social Security system 

for the same period of time. I think that is compelling evidence of 

what ownership does for families’s abilities to address retirement 

issues in the future. 

Again, I thank the Chairwoman for having this very important 

hearing today. 

Chairman PRYCE. Thank you. 

At this time, I would like to introduce our distinguished panel of 

witnesses, and we can get on to hearing from them. 

Mr. Gary Amelio is the Executive Director of the Federal Retirement Thrift Investment Board, which administers the Thrift Savings Plan. He joined TSP in 2003 with 22 years of private sector 

experience in private sector pensions and investment matters. 

Dr. Estelle James is a consultant and Professor Emeritus at the 

State University of New York at Stonybrook. Dr. James is recognized as a scholar on pension and retirement reform in developing 

countries. She has written selected papers and reports on the subject and has conducted World Bank seminars and workshops on Social Security reform in such countries as Hungary, Thailand, China 

and Poland. 

Mr. Patrick Purcell, who is a Specialist in Social Legislation for 

the Congressional Research Service, has written numerous reports 

on pension and retirement reforms for civilians and federal workers. He recently gave a well-received lecture on retirement reform 

at the University of Pennsylvania’s Wharton School Impact Conference sponsored by the Wharton School’s Pension Research Council. 

Mr. Francis Cavanaugh was the first Executive Director of the 

Federal Retirement Thrift Investment Board. He is a recognized 

author and scholar in the area of market financing of debt securities, having penned the book, ‘‘The Truth About National Debt: 

Five Myths and One Reality,’’ and other publications. 

8

We welcome all the witnesses here today and recognize them for 

a 5-minute summary of their testimony. Without objection, your 

more lengthy statements can be made part of the record. 

We will begin with Mr. Amelio. 

Thank you all for being here. 

STATEMENT OF GARY AMELIO, EXECUTIVE DIRECTOR, 

FEDERAL RETIREMENT THRIFT INVESTMENT BOARD 

Mr. AMELIO. Good morning, Chairman Pryce and members of the 

subcommittee. My name is Gary Amelio and I am the Executive Director of the Federal Retirement Thrift Investment Board, an independent agency charged with administering the Thrift Savings 

Plan. I was appointed June 1, 2003 and serve as the managing fiduciary of the TSP. Prior to my appointment, I had 23 years of private sector experience in the employee benefits, tax and fiduciary 

industry. 

Although the board has no express position regarding proposals 

to change Social Security, I am pleased to discuss the successes 

and lessons learned by the TSP. 

Since 1987, the TSP has grown to 3.4 million participants with a total of $155 billion in account balances. I often comment that 

Congress could not have provided a better structure when it created the TSP. Congress fashioned the plan with a goal of providing 

retirement savings for federal employees at low administrative cost 

and with a limited number of funds that track broad investment 

markets. This simplified structure has protected the plan from political manipulation and consequently enabled the TSP to gain the 

confidence of federal employees and become the largest and arguably most successful defined contribution plan in the world. 

The TSP’s participation rate significantly exceeds the industry 

average, primarily I believe because participants find the plan simple to grasp. The TSP participants also enjoy low administrative 

costs. Last year, expenses were just six basis points or 60 cents for 

every $1,000, which is rock bottom in the industry. I like to say 

that the TSP is the most inexpensive legal investment in the world. 

It is perhaps cheaper than illegal investments, but I do not know 

that. 

Through the years, the TSP and Congress have worked together 

to improve the plan. The TSP recently modernized its recordkeeping system to accommodate daily valuation and in the next 

couple of months life-cycle funds will be available to provide professionally designed asset allocation models appropriate for 

participants’s investment time horizons. Last year, Congress improved the plan by approving the board’s recommendation to eliminate open seasons. 

In 1986, the concept of allowing federal employees to invest in 

a retirement savings plan which included private securities was 

untested. By mandating a sound and simple structure protected 

from political manipulation, Congress created a plan which passed 

the test, gained the confidence of federal employees, and strengthened their retirement security. 

This concludes my summary comments. I ask that my extensive 

written statement be entered into the record. I would be pleased 

to respond to any questions. 

9

Thank you. 

[The prepared statement of Gary Amelio can be found on page 

48 in the appendix.] 

Chairman PRYCE. Dr. James? 

STATEMENT OF ESTELLE JAMES, CONSULTANT AND 

PROFESSOR EMERITUS, SUNY, STONY BROOK 

Ms. JAMES. Thank you. 

My comments are based on work that I did while I was lead 

economist at the World Bank for 9 years, and continuing research 

that I did after leaving the Bank. I am still involved in that research. 

Over the past 25 years, more than 30 countries spread across 

Latin America, Eastern and Western Europe, Australia and Hong 

Kong have adopted social security reforms that include funded privately managed plans, usually based on personal accounts. Contributions to these accounts range from 2.5 percent to 12.5 percent 

of wages and they are projected to supply between 30 percent and 

90 percent of total benefits. The accounts are basically part of the 

social security systems in these countries. 

In Latin America and Eastern and Central Europe, the accounts 

were created by a carve-out. In industrialized countries such as 

Australia, Switzerland, Netherlands and Denmark, employers have 

long provided employer-sponsored plans on a voluntary basis, as we 

do in the United States. At some point, governments decided everyone should be covered by these plans because only half of the labor 

force was covered on a voluntary basis. So governments made these 

plans mandatory and they were in effect an add-on for employers 

that did not provide these plans previously. 

It is interesting. This kind of option has not been discussed in 

the United States, but it is obviously one way that we could go. 

Now, I am going to discuss how these 30 countries handled three 

issues: The issue of administrative costs, which is crucial; how to 

control risk and protect low earners; and how to make payouts. I 

would like to put this in the context of two over-arching themes. 

First, workers do not have free rein over the funds in these accounts, as Mr. Frank said. There is a lot of control and regulation 

over the accounts. I think it is very important to realize that complete government control is at one end of the continuum, and complete free choice and ownership is at the other end. 

Most of these countries are somewhere in the middle. ‘‘In the 

middle’’ is where I think we should be. The important question is: 

Where do you position yourself in the middle? How much choice? 

How much control? 

The U.K. ran into trouble when it gave too much choice and too 

little regulation. On the other hand, I could cite other countries 

that had complete government control and wasted the funds, had 

low rates of return and political manipulation. So I would say being 

at either end of the continuum is not the place to be. 

The second point is that details really matter a lot. Seemingly 

small changes in rules, really the fine print, can determine whether 

you consider the outcomes good or bad. So it is really important to 

get down into the trenches and look at those details. 

10

I would like to just make a brief comment about each of those 

three issues, and then I will be glad to answer questions. Administrative costs are obviously very important because if you pay an expense ratio of 1 percent of assets per year, when you retire that 

will reduce your final pension by 20 percent, which is obviously a 

large chunk. So keeping those costs low is very important. The 

Chilean system has been criticized for having high costs. People are 

very concerned about that. 

In this connection, it is important to realize that costs are going 

to be high at the beginning. There are high startup costs. Many of 

the numbers quoted from Chile were their high startup costs. Currently, the expense ratio in Chile is 1.2 percent of assets per year, 

and it is slated to go down to .7 percent over the lifetime of a full 

career of a worker. This is lower than the average mutual fund and 

401(k) in the United States. 

However, I believe we should be able to do much better in a mandatory system by exploiting economies of scale and eliminating 

marketing expenses. The key point here is that the most important 

cost is the fixed recordkeeping costs per account, which I estimate 

we could keep to about $20 per account if we are careful. That is 

based on estimates of low-cost mutual funds and the Thrift Savings 

Plan. 

If we keep to that number, then that means that once the average account size reaches $7,000, the expense ratio will be less than 

30 basis points. So I would estimate that in the long run, we 

should be able to operate at 30 basis points or less. This will take 

us 8 or 10 years to get to that point. This is I think consistent with 

the plans that are floating around. 

However, if people are allowed to jump out of this basic system 

once their accounts reach a certain size, such as $5,000, we will 

never reach that $7,000 point and then the administrative costs for 

everyone will be higher as a percentage of assets. So this little detail that you might not even think of looking at will really determine the expense ratio and therefore the subtraction from the final 

pension. It is an example of how details matter a lot. 

In terms of controlling risk and protection of low earners, there 

are many techniques that we are familiar with: diversification, of 

course, in companies and sectors and international diversification, 

the life-cycle funds that have been mentioned. I can talk about 

them later on if you are interested. But in addition, every country, 

as Mr. Frank mentioned, every country that has a personal account 

system also has a minimum pension. 

The variation in size of the minimum pension is actually quite 

substantial, from 15 percent to 40 percent, but you could say that 

there is a sort of concentration between 20 percent and 30 percent 

of the average wage. That does set a floor and it protects workers 

both from financial market and labor market risk. That is something we could think about having here. We do not have it in our 

present system, by the way, without personal accounts. 

Chairman PRYCE. Dr. James, I just need to remind you to be 

mindful of the clock. I know you have another point to get to. 

Ms. JAMES. Okay, yes. I am moving on to the other point. Thank 

you. 

11

Payouts. Every country with personal accounts restricts payouts. 

Most European countries require annuitization to ensure that 

workers will have a life-long income. In Latin America, workers are 

given a choice between annuities or gradual withdrawals. In Chile 

where they have this choice, two-thirds of all retirees have chosen 

to annuitize. 

Lump-sum withdrawals are not permitted unless the pension 

meets a very high threshold, which varies across countries, but it 

is about 70 percent of the worker’s own wage and roughly 200 percent of the poverty line, depending on country. So the threshold 

you choose for lump-sum withdrawals is an extremely important 

detail that matters. 

Some countries require that annuities be indexed. Many of them 

require that the annuity should be joint in order to cover surviving 

spouses. This is very important for women, obviously. In Latin 

America, women can keep the joint pension in addition to their 

own pension. Whereas in the United States, as you know, women 

who work in the labor market have to give up their own pension 

if they take the widow’s pension. We have to choose. In Latin 

America in their personal account systems, women can keep both. 

As a result, women’s expected lifetime benefits relative to men’s 

have increased in the new systems. 

So my final point just goes back to the point that details are very 

important. You really have to look at them. The accounts can be 

good or bad depending on the details. The experience of other countries shows if we carefully structure the choice of asset managers, 

the investments and the payouts, and we provide a pension floor, 

including personal accounts as part of our Social Security system, 

should be able to continue to provide lifetime income security for 

the elderly in a cost-effective and low-risk way. 

Thank you. 

[The prepared statement of Estelle James can be found on page 

79 in the appendix.] 

Chairman PRYCE. Thank you. Your full statement will be in the 

record, and hopefully you can get to some of your other points. 

Ms. JAMES. Thank you. I put a lot of work into all the research. 

I am delighted when people read it and think about it. 

Chairman PRYCE. Mr. Purcell? 

STATEMENT OF PATRICK PURCELL, SPECIALIST IN SOCIAL 

LEGISLATION, CONGRESSIONAL RESEARCH SERVICE 

Mr. PURCELL. Madam Chairwoman and members of the subcommittee, my name is Patrick Purcell. I am a Pension Specialist 

with the Congressional Research Service. Thank you for inviting 

me to talk to you today about the thrift plan for federal employees. 

We already have two distinguished other panelists who are very 

expert in the thrift plan, so I am going to talk a little bit very briefly about the legislative history. 

In the legislative history of the thrift plan, two things stand out: 

First, Congress chose then and has maintained to this day a system in which all of the funds that invest in the private sector are 

index funds. This was a carefully considered choice. As the House 

committee report on the legislation stated at the time, the three 

funds authorized as passively managed funds, not subject to politVerDate 0ct 09 2002 13:53 Oct 31, 2005 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\DOCS\24092.TXT FIN1 PsN: MICAH
12

ical manipulation. A great deal of concern was raised about the 

possibility of political manipulation of large pools of thrift plan 

money. This legislation was designed to preclude that possibility. 

Likewise, the Senate committee report stated: ‘‘Another concern 

the committee wrestled with was the potential for market manipulation through political pressure. The committee specifically designed the plan to avoid this problem. The legislation provides for 

three investment funds that are all essentially self-managed.’’

The second item that stands out in the legislative history is the 

strong interest that Congress showed in establishing the independence and authority of the Federal Thrift Investment Board. The 

legislation established the Thrift Board as an independent government agency, which is required by law to operate the plan solely 

in the interest of plan participants. The law charges the thrift 

board with responsibility for developing the investment policies of 

the plan and overseeing the management of the plan. The law authorizes the board to appoint an executive director who runs the 

plan on a day-to-day basis. 

Three members of the board, including the Chairman, are appointed by the President. The President chooses a fourth member 

in consultation with the Speaker of the House and the House Minority Leader, and a fifth member in consultation with the Senate 

Majority and Minority Leaders. Members are subject to Senate confirmation and serve 4-year terms. All members are required by law 

to have substantial experience in managing financial investments 

and pension plans. 

Its independence is furthered by the fact that the federal retirement board receives no appropriations from Congress. Administrative expenses are paid through agency contributions that are forfeited by employees who leave federal service before they have vested, and by charges against participant accounts. Congress maintains oversight of the thrift plan through the House Committee on 

Government Reform and the Senate Committee on Homeland Security and Governmental Affairs. 

In summary, as we have heard and we will hear from Mr. 

Cavanaugh, the thrift plan is a key component of federal 

employees’s retirement benefits. It is an efficient provider of retirement savings accounts to the federal workforce, which has achieved 

high participation rates and low administrative costs. 

I have a longer statement to be entered in the record. This concludes my opening remarks, and I would be happy to answer any 

questions the subcommittee might have. 

[The prepared statement of Patrick Purcell can be found on page 

118 in the appendix.] 

Chairman PRYCE. Thank you, Mr. Purcell. 

Mr. Cavanaugh, welcome. 

STATEMENT OF FRANCIS X. CAVANAUGH, PUBLIC FINANCE 

CONSULTING 

Mr. CAVANAUGH. Thank you. Madam Chairwoman and members 

of the subcommittee, I welcome this opportunity to discuss the important subject of establishing individual accounts in the Social Security system. I will focus on the administration’s proposal. 

13

The critical question, of course, is cost. Individual accounts are 

proposed to provide a higher investment return than would be realized by the Social Security trust fund. On this basis, individual accounts would not be feasible for the 68 million employees of 98 percent of the businesses in the United States. That is the 5.6 million 

small businesses with fewer than 100 employees. 

To understand the cost of individual accounts for small businesses, we must first understand why 85 percent of them do not 

now have retirement plans for their employees. A major reason is 

that the 401(k) industry has found that it cannot profitably provide 

services for a company for less than approximately $3,000 a year, 

even though they enjoy economies of scale from combining thousands of employers in their centralized computer systems. 

Further significant economies of scale would not be realized by 

a central TSP-type agency because there would still be millions of 

small business workplaces to be reached. Nor can we assume that 

a new central government agency would be more efficient than the 

major 401(k) providers who now serve this market. Thus, the annual cost for an employee of a company with 10 employees would 

be $300, or 30 percent of the President’s proposed initial annual individual account contribution of $1,000, and most U.S. companies 

have fewer than 10 employees. 

These figures confirm the findings of a number of earlier studies 

by the Department of Labor and the Employee Benefit Research 

Institute. Obviously, substantial government subsidies would be 

necessary to make individual accounts attractive to employees of 

small businesses. If all Social Security taxpayers participated in 

the individual account program, the administrative costs would be 

more than $46 billion a year, which would be a subsidy to support 

an uneconomic function. 

In addition to the above costs, which are based on what the current providers are actually charging for establishing and serving 

401(k) plans on the market, there are overwhelming practical obstacles to modeling individual accounts on the TSP or on private 

401(k) plans. 

First, the TSP is administered by just one employer, the United 

States Government, with an extensive network of agency personnel 

payroll and systems staff to provide the essential employee education, retirement counseling, payroll deduction, timely funds 

transfers and error-correction functions. These essential employer 

services in 401(k) plans could not possibly be performed by small 

business employers or by a new TSP central agency. 

Second, the TSP is computerized, like all other large plans, with 

investments made promptly after contributions are deducted from 

the employee’s paycheck. With individual accounts, it would be up 

to 22 months after payday under current Social Security Administration procedures before individual accounts could be credited. 

Third, the TSP is balanced to the penny every day. The Social 

Security system is never balanced. Each year, there are billions of 

dollars in unreconciled discrepancies. 

Fourth, the TSP and the federal employing agencies have a very 

effective communications system. TSP mailings consistently have 

reached more than 99 percent of employees, but 25 percent of Social Security Administration mailings are returned as undeliverVerDate 0ct 09 2002 13:53 Oct 31, 2005 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\DOCS\24092.TXT FIN1 PsN: MICAH
14

able. Since individual accounts are certainly not feasible for employees of small businesses in particular, the only practical way to 

give them high returns is to invest part of the Social Security trust 

fund in equities. The likely increase in trust fund earnings would 

be an effective way to help maintain the solvency of the trust fund. 

Every state in the United States has authorized public retirement fund investment in stocks, which can now be done through 

broad-based index funds which avoid the problem of direct government control over particular companies. As shown in the chart on 

page eight of my prepared statement, there is even less government influence over private companies under the trust fund alternative than under the Thrift Savings Plan or the administration’s 

plan, less government influence. 

In conclusion, Madam Chairman, the administration’s plan for 

universal individual accounts is not feasible from a cost standpoint. 

The only practical way for the Social Security system to capture 

the higher returns available from investments in stocks is to diversify the Social Security trust fund investments and the trust fund 

alternative compared to individual accounts would be less disruptive of financial markets, would save tens of billions of dollars a 

year in administrative costs, and could be effective virtually immediately, rather than the 2009 starting date proposed for individual 

accounts. 

The multi-trillion transition costs of individual accounts would be 

avoided. The additional trust fund earnings would go a long way 

toward strengthening Social Security finances and would thus reduce, if not eliminate, the need for significant tax increases or benefit reductions. 

Thank you for your attention. I hope that my longer prepared 

statement will be included in the record. 

[The prepared statement of Francis X. Cavanaugh can be found 

on page 67 in the appendix.] 

Chairman PRYCE. Certainly, without objection, it will be. 

Thank you very much for your abbreviated testimony. I know 

that there is a lot that you all could offer up, and hopefully we will 

get to some of that in the questions. 

Let me just start by saying that as a federal employee I am a 

participant in TSP and have enjoyed much success in that program. My own State of Ohio is one of a half-dozen states that has 

begun to offer a 401(k)-like retirement accounts through which eligible employees can invest in a handful of state-screened mutual 

funds or other portfolios. But we have not had as much success as 

TSP in Ohio. 

Along with that, I would just like to offer up that I have a very 

friendly mailman. I see him when I am home. He stops in and we 

chat, and he likes to talk about all kinds of things we do here in 

Washington. He informed me the other day that if President Bush 

wants to really sell personal accounts, he should get the postal 

force out, because he and his wife have just made so much money 

in their Thrift Savings Plan and it is the best thing that ever happened to them, and he should just get all of the postal carriers from 

all over the country to come and share their experience. 

So my question is, what are the key features of TSP that makes 

it so successful, and participation rates so very high, compared to, 

15

for instance, what we have in Ohio? Maybe you are not familiar 

with that, but I just kind of described it, so if you have any insights, that would be great. 

Mr. AMELIO. The size of the plan helps to keep the costs so low. 

We have large dollar-amounts, as well as a large number of participants, which you would not get from any individual state in order 

to spread the cost. 

Secondly, the index funds that we utilize are about the lowestcost investment that you can find. I am a very large proponent of 

them. We are able to minimize costs. 

So if you combine those two features, the large size of the plan 

with the index funds, I think we are well managed. We do everything internally in terms of administration. That is how we keep 

the costs relatively low. 

Chairman PRYCE. Mr. Purcell, and then Dr. James? 

Mr. PURCELL. One thing I think that contributes to the high participation rate is the generous match. The federal government, of 

course, makes a 1 percent contribution on behalf of all employees 

covered by FERS regardless of whether the employee contributes, 

but then there are matching contributions so that in effect if you 

contribute 5 percent, your employing agency contributes an additional 5 percent. So that is a very strong incentive for participation. 

Chairman PRYCE. Yes. 

Doctor? 

Ms. JAMES. Yes. Well, I think you also have to look at the wagebase. That is, the average wage of the employee group and the average contribution size, because ultimately that is what determines 

the size of the account. 

As I said in my remarks, if you have larger accounts, you are dividing this fixed recordkeeping cost per account by a much larger 

number. So you can track the TSP costs over time and you can see 

that that expense ratio falls directly as the average size of the account increases, given the fact that those recordkeeping costs are 

largely fixed per account, whether it is $1,000 or $50,000. 

Chairman PRYCE. You mentioned a $20 amount per account. Is 

that over 1 year or what period of time? 

Ms. JAMES. Well, $20 is my kind of benchmark number. I take 

that out of looking at mutual funds which have recordkeeping 

costs, and that is the low end of the cheesy, the lower administrative cost mutual funds operate at about $20 per account in recordkeeping. 

Chairman PRYCE. Per year? 

Ms. JAMES. It is per year. And it is my estimate of TSP, because 

I have been unable to get the exact numbers from TSP, but it is 

my estimate of the ballpark that that is. 

Chairman PRYCE. Let’s real quickly switch over to Chile. What 

are the downsides of their system? You mentioned the high cost. 

What would you recommend us to do differently if we were to 

model from that? During our research on reforms in other countries, what are the mistakes we want to really be careful about? 

Ms. JAMES. Chile and most of the Latin American countries use 

the retail market, that is pension funds that met certain rules and 

regulations could enter. They could approach the individual worker 

and try to attract the individual worker. So it was a direct pension 

16

fund-to-worker relationship. Most of the countries in Latin America 

and Eastern and Central Europe have used that approach. 

I do not think that is the best approach for us because that is 

a costlier approach. It involves reaching a lot of little people with 

little accounts. It involves high marketing expenses. Marketing expenses can be half of total expenses in many of these countries. So 

I think the approach used in the Thrift Savings Plan, which is 

using the institutional market, aggregating the small accounts, 

using a competitive bidding process, using passive investments 

which Latin America could not use because they did not have indexes, they did not have markets the way we do. 

So we have at our disposal institutions that they did not have. 

These can help us keep costs low by competitive bidding, passive 

investment, which keeps the investment part of the account practically to zero. I mean, if you index to the S&P 500, your investment costs are virtually nothing. 

Chairman PRYCE. My time has expired. We will allow Ms. 

Maloney to proceed. Thank you. 

Mrs. MALONEY. Thank you so much. 

I thank all the panelists. There has been a lot of discussion about 

the Thrift Savings Plan, which is a great success, but this plan, of 

course, is in addition to Social Security. I would certainly support 

a similar Thrift Savings Plan for anybody in addition to Social Security. 

My question, and I would ask Mr. Cavanaugh to begin this, what 

problems might arise if the Thrift Savings Plan really becomes the 

substitute for Social Security? 

Mr. CAVANAUGH. If the Thrift Savings Plan or individual accounts became a substitute for Social Security, well, that would be 

way beyond any of the current proposals. 

Mrs. MALONEY. Or a portion of it, a portion. 

Mr. CAVANAUGH. A portion, well, if you take some of the proposals, the President’s portion for the individual accounts would be 

up to $1,000 in the first year. It would go up $100 each year thereafter, and eventually people could put in 4 percent of pay, but it 

would be over 30 years before the higher income people would get 

to that. 

That is relatively modest compared to total savings or the savings investment in the Social Security trust fund. I think the major 

question there in terms of impact is whether it is cost-effective. As 

I indicated in my prepared statement, it would not be. The expense 

ratio which the administration says would be .03 percent, according 

to my calculation based on the current market, it would be over 10 

times that amount. 

So to me, it is a nonstarter. I do not see how the program could 

get off the ground. I would bet that if the Congress enacted anything like the President’s current proposal, you would have to recall it within 6 months, once you found that there is no market 

there, and the costs that would be required. 

Mrs. MALONEY. Dr. James, building on the high cost, I am also 

concerned about the cost of transition. The plan would increase federal debt by, most economists’s estimates, by about $5 trillion in 

the first 20 years and by increasing amounts after that. The transition costs of pension systems in Argentina contributed really to the 

17

country’s financial difficulties. Of course, the United States is not 

Argentina, but we certainly have a huge national debt now of over 

$7 trillion. 

How would you address the problem of the large transition costs? 

Shouldn’t an honest proposal for private accounts include a way of 

paying for these costs other than simply increasing the federal 

debt? 

Ms. JAMES. Actually, on individual accounts, I agree with you on 

that point. I think that how we handle the transition costs is crucial. In the case of Chile, they accumulated a fiscal surplus before 

starting this system. They started out with a surplus that helped 

cover the transition costs. We are not in that position, unfortunately. 

Part of the object of an individual account system is to increase 

national saving. We have a very low national saving rate. Individual accounts would build up personal saving, but if we finance 

the transition purely through debt finance, then there would be a 

commensurate increase in public dis-saving, which would cancel it 

out, and we would not get the net increase in national saving that 

we desire. 

So I do think that is a crucial issue. My own personal view is 

that we should do one of two things. Either we should come up 

with a transition-financing plan that does not rely exclusively on 

debt finance. There are two ways of doing that: cutting government 

spending or raising taxes. I think we should face that squarely. 

The second way of doing it would be to use an add-on, rather 

than a carve-out. If you use an add-on, you do not have transition 

costs. You also do not have those offsets, the loan that gets subtracted at the end. 

So there are virtues to that. I think that if you use an add-on, 

a voluntary add-on really would not be different from what we 

have now in the form of IRAs and other voluntary plans. So it 

would have to be a mandatory add-on, which would become part of 

the overall Social Security system. So I think we either need a 

transition financing plan, or we should go the route of at least a 

partial add-on approach. That is my opinion. 

Mrs. MALONEY. Okay. My time is up, but I am also very concerned about the lower benefit because of the payback that you 

have to pay back into the system. 

Ms. JAMES. But if there is an add-on, there is no payback. 

Chairman PRYCE. The gentlelady’s time has expired. 

The Chair recognizes Ms. Biggert, the Vice Chairman of the committee. 

Mrs. BIGGERT. Thank you, Madam Chairman. 

Dr. James, Mr. Cavanaugh in his testimony expressed some 

skepticism that small companies could manage the burden of administering participation in a personal accounts system. He also indicated that the economies of scale from outside management 

groups would not be available to them. Would you agree with that 

analysis? 

Ms. JAMES. You mean if you required every employer to provide 

its own plan? It was not clear to me exactly what model Mr. 

Cavanaugh had in mind, because certainly the plans that we are 

18

talking about, that are being discussed now, would not be a company-by-company plan. 

Mrs. BIGGERT. I think probably it would be rather than like the 

Thrift Savings Plan, where there is a huge plan, that that would 

be a lot of little companies who would be managing the personal 

accounts. 

Ms. JAMES. No, I do not think it would work that way. I think 

the idea is there would be a large pool, and under the current plan 

that is being discussed, as I understand it, the small company 

would not even be involved in what was going on because money 

would continue to be withheld. If you used the carve-out approach, 

then some portion of that would be at the aggregate level subtracted off and put into people’s accounts. It would not involve company-by-company costs. 

Mrs. BIGGERT. Would it involve, though, there still has to be 

somebody who administers it. 

Ms. JAMES. Yes, certainly that is true. I think the collection 

would be done through the Internal Revenue Service, just as Social 

Security taxes are now collected. And then there would have to be 

a recordkeeping mechanism, that is what I was referring to, that 

would keep track of how much of that money went into each person’s account. 

This is done in Sweden, by the way. They have centralized recordkeeping through the tax collection system. They have centralized recordkeeping for all their workers. Workers then choose 

among 600 mutual funds. They have a lot of choice there, but the 

mutual funds do not even know which individuals are going with 

them. 

Rather, an aggregate pot of money goes to the mutual funds that 

workers have chosen. And they of course are now 70 basis points, 

and they expect it to be getting down to about 30 or 40 in the future. But they manage to give so much choice and keep costs low 

because they really have a price control system. I do not think we 

would want a price control system. That is why I think we would 

have to go the other route and use competitive bidding. 

Mrs. BIGGERT. But of course, Sweden is a lot smaller country——

Ms. JAMES. Yes, it certainly is. 

Mrs. BIGGERT.—than we are. And so to have one agency that 

would manage this whole thing, don’t you think that it would probably be farmed out to various companies who deal in these type of 

funds to manage those? 

Ms. JAMES. I think it would need to be done. I think there are 

substantial economies of scale in the recordkeeping function. Even 

mutual funds outsource to two or three large companies that do all 

the recordkeeping because of the economies of scale. 

So I think you would either have one large system or you would 

have a small number of regional systems as we have for Medicare, 

for example. I do not think you would have a lot of small companies doing this. That would not be an efficient way to go. 

Mrs. BIGGERT. I think in your testimony that you agreed with 

Mr. Cavanaugh that startup costs could be quite high initially. You 

suggested that amortizing startup costs over time is a way to ensure that costs are not so crippling in the beginning, besides having 

a surplus, which would be probably the best, if that were possible. 

19

Ms. JAMES. Yes, yes. 

Mrs. BIGGERT. Have other countries done amortization? 

Ms. JAMES. Well, for example, the countries that have used the 

retail approach where pension funds have entered on a competitive 

basis, you see that in fact their costs in the early years were higher 

than their fees. They actually made a loss in the early years which 

they recouped later on. The estimate is that the break-even point 

comes somewhere after 5 or 10 years. 

So in a sense they have amortized in that way. If we did this in 

a more centralized way, we would need a policy decision about 

that. What they did was their own private competitive approach. 

We would need to make that policy decision, and I think we would 

amortize over a large number of years so that the costs would be 

spread across more cohorts. 

Mrs. BIGGERT. Okay, thank you. 

I yield back. 

Chairman PRYCE. I recognize Mr. Frank. 

Mr. FRANK. Thank you, Madam Chair. 

Dr. James, I have a copy of a paper that was on your Web site, 

‘‘Why Personal Accounts?,’’ authored by you and Deborah James. I 

assume there is a connection. 

Ms. JAMES. My daughter. 

[Laughter.] 

Mr. FRANK. Good. It is nice to promote family. 

Ms. JAMES. She is one of the baby boomers. 

Mr. FRANK. I appreciate the balance with which you approach 

this, because you do advocate private accounts, but within a certain 

context. Ms. Maloney got at some of these, and I would like to go 

further. 

The minimum pension, one of the bullet points on page three of 

the paper, a minimum pension should be, you said, between 20 and 

30 percent. Under the system that the President has proposed, you 

could put up to half of your money into private accounts ultimately, 

as I understand it, but we also would have that reduction in a progressive way. 

Do you have any sense, that if I retired, say, making about 

$50,000 a year and I put about half into that, when you say a private pension, would that refer to the amount of Social Security I 

would get from the other half? Or do you mean in addition to that? 

Ms. JAMES. I do not exactly understand. 

Mr. FRANK. You say there should be a private pension of 20 to 

30 percent in your statement, in addition. Would that be met by 

the part of your Social Security that was not in the private account, 

if it was 50-50? 

Ms. JAMES. You mean the minimum pension? 

Mr. FRANK. Yes. 

Ms. JAMES. You know, different countries handle the minimum 

pension——

Mr. FRANK. Right. But what would you propose for us? A minimum pension should be added to offset labor and financial market 

risk. 

Ms. JAMES. You are reading from the paper. 

Mr. FRANK. From the paper, yes. 

20

Ms. JAMES. The little thing. Right. Well, I have my own sort of 

complicated view of what a minimum pension is and how it might 

be handled. I think of the public and the private part as together 

encompassing Social Security. So I do not think of just the traditional part. 

Mr. FRANK. I agree. Let me ask you this. 

Ms. JAMES. And I would think the minimum would apply, in my 

view, the minimum would apply to the total, and I would like to 

see it also linked to years worked per worker, so that people who 

work longer get a larger return, and that is complicated. 

Mr. FRANK. Let me just put it this way. Under our current system, if we were to do what has been proposed, allow private accounts with up to half and then do that progressive indexation, 

would the residual pension part be adequate in your judgment? 

Ms. JAMES. I am sorry. I do not——

Mr. FRANK. Let me try again. Suppose we adopted what the 

President had proposed. You are aware of that? 

Ms. JAMES. Yes. 

Mr. FRANK. Up to half could go into private accounts. 

Ms. JAMES. I think he has 4 percentage points going in. Right? 

Mr. FRANK. Yes, up to half of what——

Ms. JAMES. It is a little bit less than half. 

Mr. FRANK. Right. 

Ms. JAMES. Yes. 

Mr. FRANK. And also progressive indexation, as he calls it. 

Ms. JAMES. Yes. 

Mr. FRANK. If that is all we did, would that meet your standard 

for an adequate minimum pension? 

Ms. JAMES. Oh, well, no. There is no minimum in there. 

Mr. FRANK. Okay. Thank you. 

Ms. JAMES. Nor is there a minimum in our current system. 

Mr. FRANK. I understand that, but we are talking about changes. 

Ms. JAMES. Yes. 

Mr. FRANK. In fact, on that subject, you do say also in the paper, 

wage indexation of the traditional benefit should continue. If you 

switch to price indexation, the benefit would call drastically relative to the wages and contributions that rise over time. Many seniors will end up way below the average standard of living. 

So that you would not support the progressive indexation as it 

has been proposed, at least not at the level of cut-off where it now 

is? 

Ms. JAMES. I think progressive indexation is better than pure 

price indexation. 

Mr. FRANK. That is not what I asked you. 

Ms. JAMES. If I were——

Mr. FRANK. Dr. James, excuse me. I am trying to deal with this. 

Ms. JAMES. I understand. I want to tell you what my——

Mr. FRANK. I am asking you for your opinion. If you do not want 

to give it, just tell me. 

Ms. JAMES. No, no. I want to——

Mr. FRANK. All right. This is what you said. Wage indexation 

should continue. 

Ms. JAMES. Yes. 

21

Mr. FRANK. There has been a proposal that it should not continue at a fairly low level of cutoff. I am just asking for your opinion on that. 

Ms. JAMES. Yes. I would like to see the current replacement rate 

be maintained into the future out of the two parts of social security, including the accounts. 

Mr. FRANK. All right. I appreciate that. 

Ms. JAMES. That would be my objective in structuring a new system. I would try to make sure that the relationship of the pension 

to the wage remained where it is today, but I would think of the 

two income streams as contributing to that. 

Chairman PRYCE. Thank you. The gentleman’s time has expired. 

Mr. FRANK. Dr. James, I am kind of disappointed. I was really 

trying to have a straightforward conversation. I gather you are 

kind of reluctant to look like you might disagree with the administration. I do not think we have a good discussion if you feel constrained in that way. 

There are other things in the paper. Would you mind if I put 

some of these in the record? 

Ms. JAMES. No. I am delighted to put it in the record. 

Mr. FRANK. Thank you. 

Chairman PRYCE. I recognize Mr. Pearce. 

Mr. PEARCE. Thank you, Madam Chair. 

Mr. Amelio, when I called the TSP office and asked them the relative costs, and I know you cannot give it exact, but they tell me 

the cost of administering the plan is about .001, and maybe even 

as low as 0.006, 1/10 of 1 percent down to 60 percent of 1/10 of 1 

percent. Is that about right? 

Mr. AMELIO. The cost on a basis point level would be 0.006. That 

is six basis points. If you take our entire budget and divide it 

among the participants, it comes to approximately $26 per participant per year. That is 100 percent of the cost. 

Mr. PEARCE. Right, 0.006. 

Mr. AMELIO. A basis point would be 0.001. You would have to get 

another——

Mr. PEARCE. Yes, I understand. 

Mr. Cavanaugh testified that the administrative costs would be 

at least 10 times that. If we went from three million participants, 

or three-and-a-half million, whatever you have now, to 40 million, 

because we are told that 40 million baby boomers are going to go 

into retirement. Let’s say that only another 10 million or 15 million, so if we go from 3 to 15 million people in the plan, can you 

see where you administrative costs are going to go up by 10 times? 

Mr. AMELIO. If we increase the number of participants substantially, is that your question, Congressman? 

Mr. PEARCE. Yes. 

Mr. AMELIO. The costs may go up marginally. They would not go 

up incrementally. In other words, if we doubled the number of participants in our plan, we would not necessarily double the amount 

of costs in our plan, no. 

Mr. PEARCE. So the cost structure might stay the same, but not 

increase dramatically. 

Mr. AMELIO. With respect to the TSP, that is correct, yes. 

22

Mr. PEARCE. Mr. Cavanaugh, in your testimony you declare that 

the system of personal accounts would not work because private 

companies like my company, and I have a small company, at one 

point we had 50 employees. I never visualized, when I am sitting 

here talking about Social Security reform, I never visualized that 

I would do anything more as an employer than what I do right 

now. I simply get the employee to fill out a W-2 for the Internal 

Revenue; maybe a W-4; maybe add a little bit of WD-40 to make 

it work well when I send it in, but I do not do much. 

I do collect the taxes from my employees, and I write the check 

for myself, and I send that to Social Security. Your whole assumption in saying that personal accounts will not work is that I am 

suddenly going to take the administrative function from Social Security away from Social Security and start doing it myself. I never 

conceived of that as we are sitting here in the broad stage of discussion. 

Would your opinion about the personal accounts sustain if we did 

not make your initial assumption that I, as an employer, was going 

to take over the Social Security Administration’s functions? If we 

do not make that assumption, if we instead leave the functions 

with Social Security, will your evaluation stand in the same position? 

Mr. CAVANAUGH. The problem is, and I speak in terms of the current market, the market looked at this problem years ago. They 

thought since they had already provided 401(k) plans successfully 

for large corporations——

Mr. PEARCE. My question, sir, if you would address that, is will 

your perception stand if you do not go in with your initial assumption? The assumption of your entire argument is that I as an employer am going to take the function of Social Security Administration, which I never believed that that plan would do. 

You say that small companies cannot administer 401(k)s and 

that they do not have them. All I do right now with Social Security 

is I take the money from my employees; I write a check to Social 

Security or the government. 

I think that is all that we would be doing if we had personal accounts. The administration would slide over to an agency like TSP. 

I would not be required to find people to administer the plan. I do 

not have people to administer a plan right now. With four or five 

employees, it just does not get that far. 

But I do not perceive the initial assumptions that you make, and 

we come to a different conclusion. My question is, would your conclusion stand if you do not make your initial assumption? If we instead expect Social Security to set up a TSP plan, would your conclusions still stand in the same position they do now? 

Mr. CAVANAUGH. Yes. My conclusion would still stand because if 

you do not do anything more as a small company than deduct the 

tax and send it in to IRS, which is what you say you are doing now, 

that is not what the administration or any of the individual account proponents are talking about. 

They are talking about a 401(k)-type plan. The industry, when 

they try to bring these 401(k)-type plans, such as is proposed now, 

to small business, they have found that if the business has less 

than 10 employees, they do not want to talk with them, because 

23

there is too much involved beyond what you are talking about in 

terms of taking money——

Mr. PEARCE. My time has elapsed. In due respect, I never think 

that the plan that we are talking about is going to be set up that 

way. I think that what we are talking about is that the money will 

be sent to Social Security and a person can opt with Social Security 

to put some in a personal account, and it will be very similar to 

the TSP plan that we have, and that TSP plan will be administered 

by an administration very much like we have. 

Chairman PRYCE. The gentleman’s time has expired. 

Mr. PEARCE. Thank you, Madam Chair. 

Chairman PRYCE. Ms. Moore, the gentlewoman from Wisconsin. 

Ms. MOORE. Thank you, Madam Chair. 

I would like to yield 3 minutes to Mr. Frank. 

Mr. FRANK. Thank you. 

I want to try again, Dr. James. It says in this paper here, wage 

indexation of the traditional benefit should continue. Do you still 

believe that? 

Ms. JAMES. Yes. 

Mr. FRANK. Then even if we have private accounts, you would 

still want there to be wage indexation and not price indexation? 

Ms. JAMES. I would want it to be wage indexed. 

Mr. FRANK. Good. Okay. 

Ms. JAMES. But could I add something to that? Because I do 

think we are going to need to have to figure out some way to save 

money on that traditional part so other changes would have to be 

made. 

Mr. FRANK. Right. 

Ms. JAMES. For example, raising the retirement age is one thing. 

Mr. FRANK. I understand. But another change you mentioned, 

and again you mentioned it, but I think you believe that if we do 

not stick with wage indexation, even with private accounts there 

could be a reduction in the cost of living, in the standard of living 

of people. That is what you said, Dr. James. 

Ms. JAMES. Yes. 

Mr. FRANK. Okay, second question then. On the transition costs, 

you say they should not be debt-financed as the current proposal 

is. 

Ms. JAMES. Right. 

Mr. FRANK. Here is what you say, instead the limit could be 

raised on earnings subject to payroll tax. You note that recently 

most of the wage increase has been above the $90,000. 

Ms. JAMES. That is right. 

Mr. FRANK. Or better still, a surtax on all incomes could be imposed. Do you still prefer those methods, to debt? 

Ms. JAMES. Yes, I still do. 

Mr. FRANK. Okay. So you are for private accounts, but with wage 

indexation remaining and an increase in retirement age, and it 

being financed, the transition, by some increase in taxation. Is that 

correct? 

Ms. JAMES. That kind of plan. You know, I was outlining something very briefly and I still stand by the——

Mr. FRANK. I am not putting words in your mouth. You put this 

on your Web site. 

24

Ms. JAMES. That is right. 

Mr. FRANK. I did not have a search warrant. I really just read 

it. Thank you. 

I yield back. 

Ms. JAMES. If I could just add to that. Consistent with what I 

said, I think that personal accounts have the propensity to improve 

our system, but I think how you do it and how you get there——

Mr. FRANK. I understand that. What I will say is this, there are 

various ways to do it. I should have added also that you propose 

that personal accounts be partly with an additional contribution 

and partly out of Social Security. So yes, if you are talking about 

increasing taxes one way or the other, raising the retirement age, 

keeping wage indexation, and financing them partly by additional 

and partly from, that is a good proposal. Nothing that we have 

seen resembles it, that is all, other than yours. 

I yield back. 

Ms. MOORE. Thank you. This is a very distinguished panel and 

I would love to ask all of you questions, but I guess I want to pursue the line of questioning that Mr. Pearce started with Mr. 

Cavanaugh, and indeed with Dr. James. I want a clarification on 

the cost of the thrift saving plan. 

It is my understanding, Mr. Cavanaugh, that the reason that you 

think that cost efficiencies could not be realized is because literally 

200 million workers and all of those employers would have to have 

payday of the very same day as the federal government; they would 

all have to submit the paperwork. There are now about 13,000, 

thousands of telephone counselors that would be needed. Could you 

just explain that a little bit more? 

To follow up, Dr. James, can you explain to me why you believe 

that we could avoid the transition costs when the thrift saving plan 

and the federal government under Social Security enjoys not paying those costs because it buys those Treasury bills itself and does 

not have to pay, and it is not the retail approach. So I am very confused as to how you think we could avoid those costs. 

Thank you. 

Ms. JAMES. Who is going to answer first? 

Ms. MOORE. It is up to you. 

Mr. CAVANAUGH. Go ahead, Estelle. 

Chairman PRYCE. There are 48 seconds remaining, so divide it 

up appropriately. 

Ms. JAMES. Are you referring to the transition costs or the startup costs? Transition costs come from a carve-out. The startup costs 

are the costs that you have to incur to get the IT system going and 

get the whole system established. Which are you referring to? 

Ms. MOORE. Well, you are the one that is telling us that——

Ms. JAMES. Well, I think the startup costs, you cannot avoid. 

There are going to be startup costs. My proposal for that is that 

it should be amortized over many years because in fact it will serve 

many future cohorts of workers. 

With respect to transition costs, that is a whole other story. 

There, I think you need a transition cost financing plan which 

would come partly out of taxes, partly out of cuts in government 

spending. These are the possible places it could come from. I think 

it should not come exclusively from debt finance. 

25

Chairman PRYCE. The gentlelady’s time has expired. 

I recognize Mr. Neugebauer. 

Ms. MOORE. The witness will not be allowed to answer me, 

Madam Chair? 

Chairman PRYCE. We are up against a series of votes and I think 

she completed her sentence. So we will go on. 

Ms. MOORE. Thank you. 

Mr. NEUGEBAUER. Thank you, Madam Chairman. 

Mr. Amelio, I have a TSP account. Do I have an account number, 

or do you use my Social Security number? 

Mr. AMELIO. Your account is recognized by your name and your 

Social Security number. 

Mr. NEUGEBAUER. So at payday, you get an electronic notification 

that I have withdrawn a certain amount of money, and that information from all the federal employees is sent to you electronically, 

is it not? 

Mr. AMELIO. There are 130 payroll offices throughout the federal 

government. Each of those payroll offices transmits to us. I believe 

we actually receive money on a daily basis, although every other 

week are the heaviest transmissions. 

Mr. NEUGEBAUER. But you probably receive that electronically, is 

that correct? 

Mr. AMELIO. They are all electronic. Yes, sir. 

Mr. NEUGEBAUER. And so when we are talking about a system 

where we are going to divert, and one other question, and you do 

not own any securities in TSP? You contract, when I give you 

money, you give money to a fund that is tracking the S&P, but 

your organization does not buy stocks every day. It just invests into 

the funds that you have contracted with. Is that correct? 

Mr. AMELIO. The fund holds five investments. One of them is, of 

course, the G Fund or Treasury securities. The other four are index 

funds. They are managed by Barclay’s, which has to get an award 

by competitive bidding. There are commingled funds, which are 

similar to, but not identical to mutual funds. We hold funds. We 

do not hold individual securities. 

Mr. NEUGEBAUER. Right. So you hold the funds. So really what 

we are talking about, and this notion of having employers managing accounts, is not the president’s proposal. 

The proposal on the table is, or one of the proposals that have 

been brought forward is basically taking Social Security, where we 

already have account numbers, we already have names, and so basically transitioning that money rather than into the federal treasury, a portion of that, 2 percent or 4 percent, whatever the number 

is, is transitioned into an account that says Randy Neugebauer 

now has $100 more in his retirement account this month through 

the new personal account system than he had last month. 

At the end of the month now when I get a statement, it says so 

much went into TSP, and then it says so much went into Social Security. But you know what the balance in my Social Security account is? It is zero. I have a balance in my TSP account. 

What we are talking about, we already have a very sophisticated 

collection system in place with the IRS. It has accounts in the Social Security numbers. That is very easily transitioned, and that information and those funds transferred to a third-party provider 

26

that we would contract for, and then everyone would have an account. So I think to just kind of scare people off that this is going 

to cost $200 for $1,000, you know, I think that is bad information. 

One of the things that I wanted to ask Dr. James about, what 

is your perception of the downside of going to private accounts? 

Some people are worried about the benefits being less, but we already have seen a track record where actually the returns are better. 

So if you want to put a floor on what the benefits would be, it 

looks like to me we are actually from an annuity standpoint, actually reducing the potential for liability, even if we looked at a minimum guarantee as staying on the current system, or are going to 

a system where we are investing a portion of those funds in a higher account. 

Ms. JAMES. I am sorry. I do not exactly——

Mr. NEUGEBAUER. I think the point some people were trying to 

say, is there a minimum retirement level that we think you would 

maintain. 

Ms. JAMES. I think I was asked about whether there should be 

a minimum pension built into our system. I would favor a minimum pension that was tied to years of work so that people who 

work many years at low rates of pay are assured of a certain minimum relative to the average wage. I think that would also help 

to assuage some of the fears that with an individual account you 

might experience bad investment returns, and that would be particularly bad at the low end of the income scale where people would 

have a hard time cushioning. 

So a minimum pension is one way to assure people that if they 

invest and if there is a prolonged period of poor investment returns, people who had worked most of their lives would be assured 

of a certain minimum standard of living. That is what I would 

favor and I think it would help to overcome some of the fears of 

accounts. 

Chairman PRYCE. The gentleman’s time has expired. 

Mr. NEUGEBAUER. My time has expired. 

Chairman PRYCE. We will go on to recognize Ms. Waters. 

Ms. WATERS. Thank you very much. I appreciate this hearing. I 

think this is very important. We still all have a lot to learn. 

I was interested in the discussion about the minimum account 

guarantee. Do you know if the President has adopted this kind of 

thinking of a guarantee for those who may find themselves at risk 

because they have invested in ways that cost them? Do you know 

if this concept has been included in anything that has been produced by the President and this administration? 

Ms. JAMES. As far as I know, that is not in the current plan. As 

you know, we do not have a lot of details about the current plan. 

I have not seen that. It also is not in our current system, let me 

reiterate. So we have to put it in that perspective. 

Ms. WATERS. Well, but it is a little bit different. The reason I like 

the idea, if we ended up going that way, for some kind of a minimum guarantee, is that the current system guarantees you that 

for as long as you live, that Social Security check will be deposited 

in your account. We have that guarantee. 

Ms. JAMES. Right. 

27

Ms. WATERS. Even out through the year 2042, it guarantees that 

80 percent of it would be there. Most people agree you could do 

some very simple things, as you suggest doing, in the way that you 

have the minimum guarantee, while the transition costs I suppose 

of all of this, or increasing or lifting the ceiling on the payroll tax. 

You talk about using that for transition costs. Is that right? 

Ms. JAMES. I think in the piece that Mr. Frank referred to, I 

talked about how that could be financed by raising the payroll tax 

or having a surtax on incomes is one way to finance the transition. 

That is right. 

Ms. WATERS. Okay. But I suppose what I am getting it is, number one, that I like the idea of the minimum guarantee; that we 

do have a guarantee now. And even at 2042 where 80 percent perhaps could only be guaranteed if in fact you lifted the ceiling on 

the amount of payroll taxes and increased that somewhat, we could 

fully fund Social Security, in the same way that you describe that 

you could fund transitional costs. Is that correct? 

Ms. JAMES. It would require a substantial increase to fund the 

entire Social Security benefit. Your question actually gets to a very 

key point. If we are going to put more revenue into the system, 

should it go into the traditional benefit or should it go into personal 

accounts. 

Ms. WATERS. That is right. What I did not hear was, because I 

keep hearing this huge amount that it would take to transition and 

to set up these accounts, whether you are suggesting that you lift 

the ceiling, you lift the payroll taxes to finance that. 

Ms. JAMES. If I could just respond to that, because it is really the 

central question and I think we ought to focus on that a little bit 

in the broader debate. One problem with raising taxes and putting 

more revenue into the traditional system, is that in the interim period, over the next 30 or 40 years, that will be building up the trust 

fund. You then have to ask how will the money in the trust fund 

be invested. 

Now, right now the money in the trust fund is invested exclusively in government bonds. There is some evidence that that actually increases the government’s deficit; that it is not only invested 

in government bonds that would have existed otherwise, but it encourages additional deficit finance because here is this pot of 

money sitting there that only the government gets access to. 

Now, if this increases the government deficit, then eventually 

taxpayers are left with a larger set of obligations that they have 

to fulfill. That will simply result in a larger taxpayer burden down 

the road. In other words, really the question is can we effectively 

save in this way by simply building the trust fund. The proposal 

to put all that extra revenue into the trust fund would run the danger that we really would not be saving; that it would be in the 

trust fund, but it would become an additional government deficit. 

Ms. WATERS. I understand that, but I would have to look closely 

at that deficit argument to see if really that is what happens. What 

worries me a bit about this discussion of the private accounts even, 

particularly about your take on this, that a minimum guarantee as 

done in other countries that you have identified, would give you 

some kind of safety net. 

28

What I am really concerned about is this: Over the past several 

years, last two years or so, even in the TSP accounts, those people 

that were heavily invested in one of those markets lost money. 

With these investment accounts, if you are in your last couple of 

years of retirement and you do not have a minimum guarantee, 

and you lose the money that you are allowed to invest, how then 

do you recoup it? What do you do? Because I think we have seen 

some evidence of that in TSP, even though it is considered pretty 

good. I mean, it is pretty safe. 

Chairman PRYCE. The gentlelady’s time has expired. I would be 

happy to allow a brief answer, and of course we can submit further 

questions. 

Ms. JAMES. Right. I will make my answer very brief. I am sure 

you know the historical data. All we have is the past. We do not 

know for sure what the future will hold. Historically, we know that 

for any 20-year period in the past, you would not have lost money. 

You would have come out ahead with a stock market investment 

rather than bonds. Now, the future may be different and no one is 

proposing all this money should be put into the stock market. So 

that is part of my answer. 

Another part of the answer is, I think people should move out of 

stocks gradually as they are approaching retirement age. I think 

waiting until the last moment is dangerous for the very point you 

mentioned. The market could fall on the day that you decide to 

move out. So I think a gradual move-out during the 5 to 10 years 

prior to retirement is the way that I would recommend doing this. 

Finally, I think we are mostly concerned about the low end of the 

spectrum in this regard, and that is where I think some kind of 

minimum guarantee would be useful. 

Ms. WATERS. Thank you, Madam Chair. 

With unanimous consent, just to raise the question of who is 

going to tell Ms. Mary Jones how to do that strategy. I am at retirement age and nobody told me. So where do they get this information from? 

Ms. JAMES. It has to be built in. It has to be structured. You cannot depend on individuals to think it through. 

Ms. WATERS. That is right. That is absolutely true. Thank you. 

Chairman PRYCE. Thank you. 

We are at a vote now, and the Chair notes that some members 

may have additional questions for this panel. They are encouraged 

to submit them in writing. Without objection, the hearing record 

will remain open for 30 days for members to do so and for the witnesses to place their responses in the record. 

We are very, very grateful to all of you for spending time with 

us this morning. It was most informative, and thank you for being 

here. 

This hearing is adjourned. 

[Whereupon, at 11:45 a.m., the subcommittee was adjourned.] 

(29)

A P P E N D I X

May 5, 2005

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